Last year was full of challenges for Westinghouse Air Brake Technologies (NYSE:WAB), or Wabtec. Not only was the rail industry under pressure due to slowing global trade, but it has taken the company longer than expected to close its acquisition of Faiveley Transport. Those issues clearly weighed on the company's fourth quarter results. However, some of those challenges are now in the rearview mirror, which gives the company confidence that 2017 will be a better year.

Wabtec's results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$760.0 million

$832.8 million

(9%)

Net income

$37.8 million

$101.8 million

(63%)

Adjusted EPS

$0.42

$1.05

(60%)

Data source: Westinghouse Air Brake Technologies Corp.

What happened with Wabtec this quarter? 

Acquisition costs and weak freight sales weighed on results:

  • Net sales within the company's freight group plunged 32% to $341.4 million due to lower revenue from train control-related equipment and services as well as lower industry deliveries of new freight cars and locomotives. In addition, foreign exchange headwinds sliced $22 million off the top line compared to the year-ago quarter.
  • Wabtec partially offset those issues by delivering healthy sales within its transit group, which rose 26% to $418.6 million.
  • Acquisitions played a significant role during the quarter. Wabtec benefited from the recent acquisitions of Gerken Group, Workhorse Rail, and the purchase of a majority ownership in Faiveley Transport. That said, the company recorded $26 million in transaction expenses relating to the Faively deal and another $15 million of costs relating to contract adjustments and restructuring. Overall, the net effect of these and other one-time items reduced earnings by $0.39 per share during the quarter. If we adjust for this impact, earnings would have only declined by 23% as a result of the weakness in the company's freight group.
  • For the full-year, sales were down more than 11% to $2.9 billion, which was slightly below its most recent guidance of $2.95 billion. Earnings, likewise, missed the mark, coming in at $3.34 per share, which was below its guidance of $3.45 to $3.50 per share.
Old train wheel on a track.

Image source: Getty Images.

What management had to say 

CEO Raymond Belter commented on what impacted the company's results by saying that:

During 2016 we faced many challenges, including significant headwinds in our freight and industrial markets. Yet, our financial results were among the best in our history, we generated more cash from operations than net income, and we completed the most important strategic acquisition we've made to date. I'm pleased with how our team responded to difficult market conditions, some of which will persist in 2017. We will continue to control what we can by managing our costs aggressively, while working diligently on the integration of Faiveley. We will also continue to invest in our balanced growth strategies and expect to benefit from our diversified business model and rigorous application of the Wabtec Excellence Program.

Last year was a tough one for railcar manufacturing companies. Trinity Industries (NYSE:TRN), for example, saw its rail group revenue plunge 28% during the fourth quarter while its profitability dove 59% due to lower railcar deliveries. Trinity Industries noted that the oversupply of railcars in North America was one of the many challenges it faced last year. Meanwhile, fellow railcar maker Greenbrier Companies (NYSE:GBX) experienced a 7.2% sequential decline in revenue last quarter due to lower deliveries. While both companies, like Wabtec, see some of these industry headwinds persisting, Greenbrier Companies did reaffirm its guidance for 2017 because regular communications with its customers gave it the confidence that they will not cut orders.

Looking forward 

Wabtec also sees the market slowdown starting to wind down. The company expects its revenue to rise to $4.1 billion thanks to the impact of Faiveley, while adjusted earnings should be in a range of $3.95 to $4.15 per share. Further, while the company sees its first quarter earnings remaining flat with the fourth quarter, it expects its results to be stronger in the second half of the year due to projects already in the backlog and the timing of synergies from Faiveley. Meanwhile, if some of the headwinds in the freight market start to abate, results could rise above those expectations.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends The Greenbrier Companies and Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.